Dr. Sulaiman Al Habib Medical Services Group Company's (TADAWUL:4013) Stock On An Uptrend: Could Fundamentals Be Driving The Momentum?

Dr. Sulaiman Al Habib Medical Services Group's (TADAWUL:4013) stock is up by a considerable 19% over the past three months. As most would know, fundamentals are what usually guide market price movements over the long-term, so we decided to look at the company's key financial indicators today to determine if they have any role to play in the recent price movement. In this article, we decided to focus on Dr. Sulaiman Al Habib Medical Services Group's ROE.

Return on equity or ROE is an important factor to be considered by a shareholder because it tells them how effectively their capital is being reinvested. Simply put, it is used to assess the profitability of a company in relation to its equity capital.

View our latest analysis for Dr. Sulaiman Al Habib Medical Services Group

How Do You Calculate Return On Equity?

Return on equity can be calculated by using the formula:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for Dr. Sulaiman Al Habib Medical Services Group is:

20% = ر.س976m ÷ ر.س5.0b (Based on the trailing twelve months to September 2020).

The 'return' is the profit over the last twelve months. Another way to think of that is that for every SAR1 worth of equity, the company was able to earn SAR0.20 in profit.

What Is The Relationship Between ROE And Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming all else is equal, companies that have both a higher return on equity and higher profit retention are usually the ones that have a higher growth rate when compared to companies that don't have the same features.

Dr. Sulaiman Al Habib Medical Services Group's Earnings Growth And 20% ROE

At first glance, Dr. Sulaiman Al Habib Medical Services Group seems to have a decent ROE. Further, the company's ROE compares quite favorably to the industry average of 8.5%. As you might expect, the 6.0% net income decline reported by Dr. Sulaiman Al Habib Medical Services Group is a bit of a surprise. Based on this, we feel that there might be other reasons which haven't been discussed so far in this article that could be hampering the company's growth. For example, it could be that the company has a high payout ratio or the business has allocated capital poorly, for instance.

From the 7.1% decline reported by the industry in the same period, we infer that Dr. Sulaiman Al Habib Medical Services Group and its industry are both shrinking at a similar rate.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. By doing so, they will have an idea if the stock is headed into clear blue waters or if swampy waters await. One good indicator of expected earnings growth is the P/E ratio which determines the price the market is willing to pay for a stock based on its earnings prospects. So, you may want to check if Dr. Sulaiman Al Habib Medical Services Group is trading on a high P/E or a low P/E, relative to its industry.

Is Dr. Sulaiman Al Habib Medical Services Group Making Efficient Use Of Its Profits?

Despite having a normal three-year median payout ratio of 27% (where it is retaining 73% of its profits), Dr. Sulaiman Al Habib Medical Services Group has seen a decline in earnings as we saw above. So there could be some other explanations in that regard. For instance, the company's business may be deteriorating.

Upon studying the latest analysts' consensus data, we found that the company's future payout ratio is expected to rise to 66% over the next three years. However, the company's ROE is not expected to change by much despite the higher expected payout ratio.

Summary

On the whole, we do feel that Dr. Sulaiman Al Habib Medical Services Group has some positive attributes. However, given the high ROE and high profit retention, we would expect the company to be delivering strong earnings growth, but that isn't the case here. This suggests that there might be some external threat to the business, that's hampering its growth. Having said that, looking at current analyst estimates, we found that the company's earnings growth rate is expected to see a huge improvement. To know more about the company's future earnings growth forecasts take a look at this free report on analyst forecasts for the company to find out more.

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This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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